This dissertation includes two chapters in the field of international finances about foreign exchange rate predictability and testing purchase power parity. In each chapter, we build the theory, methodology, and the empirical results to present the paper¡¦s construction. The first chapter, we studies whether the pure price inflation rate which is extracted from stock return can help us to test the relative of purchasing power parity in where Asian countries include Malaysia, Korea, Taiwan, Thailand, Hong Kong, and Singapore against the United States. The paper of Chowdhry et al. (2005) argue that relative PPP may not hold for the official price inflation rates which is constructed from consumer price indices, since relative price changes and other frictions cause price to be sticky. Thus, they use the Fisher equation and Fama-French three factors elaborately to build up a model on the nominal return of real risk-free asset to extract the pure price inflation rates. Their argument is supported in the case of Japan, Germany, the United States, and the United Kingdom. We are interested in the case of some Asian countries. So, this chapter, we extend the model and methodology of Chowdhry et al. (2005) to test the relative PPP for Asian countries. If our empirical evidence is firmly supported, it will be a strongly reconfirmed the elaborated idea of Chowdhry et al. (2005). In our study, the PPP rule is not supported for Asian countries since joint null hypothesis of a=0 and b=1 are rejected at all horizons except Taiwan at monthly horizon. The testing results by constrained seeming unrelated regression (SUR) and system equation in pooled data are similar to the tests of country-by-country. Therefore, we apply the methods of panel unite root from Im et al. (2003), Maddala and Wu (1999), and Pesaran (2007) to test the PPP doctrine, and it is strongly supported PPP for Asian countries. The second chapter, we extract the estimated data of pure price inflation by Chowdhry et al. (2005), and use the data to build up a nonlinear STR (smooth transition autoregressive) model by Granger and Teräsvirta (1993), then compare the performance of linear or nonlinear model of exchange rate predictability with random walk model in the United States, the United Kingdom, Japan, and Germany. This study has presented evidences that the extracted inflation rates offer a good predictability on the prediction of exchange rate for the United Kingdom and Germany. Those extracted data in which are calculated from the industry portfolio returns of stock market. The issue of series correlation in regression error does matter the estimated coefficients £]k, thus we estimate the simulation of Gaussian bootstrap distribution for testing variables with Newey West standard deviation in regression estimate. The empirical evidences show that the PPP doctrine affects the predictability performance of exchange rate change by the extracted inflation rates.

Exchange rate forecasting is hard issue for most of floating exchange rate economies. Studying exchange rate is very attractive matter since almost no model could beat random walk in short run yet. Relative yields and information in relative yield curves are contemporary topics in empirical literature and this study follows Chen and Tsang (2009) who model exchange rate changes with relative factors obtained from Nelson-Siegel (1987) yield curve model and find that relative factor model can forecast exchange rate change up to 2 years and perform better than random walk in short run. Analysis follows the methodology defined by Chen and Tsang (2009) and TL/USD, TL/EUR exchange rate changes are modeled by the relative factors namely relative level, relative slope and relative curvature. Basically, 162 weekly datasets from 09.01.2007 to 16.03.2010 are used and the relative factors for each week are estimated. Afterwards, regression analysis is made and results show that relative level and relative curvature factors are significant up to 4-6 weeks horizon but relative slope does not provide any valuable information for exchange rate prediction in Turkish financial market. Length of forecasting horizon of relative factor model is too short when compared to other exchange rate models. Since it is accepted that exchange rates follow random walk, we provided some tests to compare performance of the model. Similar to the literature, only short run performance of relative factor model is compared to random walk model and concluded that the relative factor model does not provide better forecasting performance in Turkish financial market

The diploma thesis deals with currency market analysis. There are three main types of analysis: fundamental, technical and psychological analysis. Each of these methods contains explanation of logic, on which the method is based, its advantages, disadvantages and specific examples of this analysis. Neural networks are furher explained in technical analysis. The practical part of the diploma thesis builds on knowledge of technical analysis and tests functionality of the neural networks in the environment of currency markets. The model is calibrated first and then it is used to predict the development of major currency pairs. The prediction is carried out on a monthly chart for December 2013.